The time is right to snap up "bargains" in the financial markets following the widespread sell-off, according to Howard Marks, one of the world's most formidable distressed debt investors.
"Today I am starting to behave aggressively," the founder and co-chair of Oaktree Capital said in an interview. "Everything we deal in is significantly cheaper than it was six or 12 months ago," he added, highlighting drops in the prices of high-yield bonds, leveraged loans, mortgage-backed securities and collateralised loan obligations.
The main gauge used to measure junk US corporate debt has registered a loss of just under 13 per cent this year, its largest since the financial crisis in 2008, according to Ice Data Services.
Prices of loans offered to lowly rated corporate borrowers have fallen more than 5 per cent and are trading on average at 93.27 cents on the dollar, levels last seen in November 2020 just before Covid-19 vaccine breakthroughs were reported, data from S&P and the Loan Syndications and Trading Association showed.
Marks said Los Angeles-based Oaktree did not make investment decisions based on macro forecasts — such as how high inflation would rise or whether there would be a recession — nor try to time the market.
"I think the idea of waiting for the bottom is a terrible idea," he said. Assets could get cheaper than current valuations "in which case we'll buy more".
Marks, 76, co-founded Oaktree in 1995 with a strategy of investing in "good companies with bad balance sheets" and has built the company into a US$164 billion (NZ$260b) powerhouse of debt investing. The company does not publicly disclose its financial performance.
His career has been founded on making big bets when and where others are unwilling to do so, and he sets out his investment views in a popular series of memos, whose regular readers include Warren Buffett.
"We're more aggressive if we think ... bargains are rife," he said. "And we are more defensive if we think the market is elevated and investor behaviour is imprudent."
Defensive to aggressive
Over the past year, Marks has advocated positioning on the more defensive side. "I thought asset prices were reasonable given where interest rates were, but I thought interest rates would go up, which meant prices would go down."
Financial markets have sold off as the Federal Reserve has begun to sharply raise interest rates, piling pressure on treasurers across the globe. Borrowing costs have shot higher, with yields on highly rated corporate debt in the US averaging 4.72 per cent this week, double the level at the end of 2021.
For riskier groups rated junk by the major credit rating agencies, yields are now above 8.5 per cent, up from 4.32 per cent.
Oaktree, which sold itself to Canadian infrastructure group Brookfield at a near US$8b valuation in 2019, is one of the oldest specialists in chasing companies for unpaid debts. Marks said that while he expected the number of corporate bankruptcies to increase — following a period in developed markets where abundant cheap money from central banks has kept them low — he did not think this would reach double-digit levels like it did in previous crises.
Companies have taken advantage of low interest rates to lock in cheap financing during the pandemic, he said.
The bulk of Oaktree's assets are managed in credit strategies but it also has much smaller divisions in real assets, listed equity and private equity. Marks questioned whether the average private equity fund could consistently outperform listed markets, and said leverage contributed a large part of the sector's returns.
"Maybe the best private equity funds really do outperform, or maybe the rest do so in brief periods," he said. "But you can't talk about private equity outperformance over the long term based on the average private equity firm and the research that I've seen. Yes, private equity has produced very good returns in the last few bullish years. But given their leverage, shouldn't that be expected in such a period?"
Bull market complacency
Until this year, and barring a sharp sell-off at the start of the pandemic, US equities were in a decade-long bull market, which Marks said had bred complacency. "When things are going well, people don't worry about the downside. And they push into new areas that they have never been in before."
He pointed to areas such as private assets, where mainstream investors in stocks and bonds have expanded, some with seemingly little concerns for matching fund liquidity with the underlying assets. "That's bull market behaviour," said Marks. "But when you get withdrawals in an illiquid market with declining values, those funds melt down."
Marks argued the same psychological dynamics had driven investors into cryptocurrencies.
"The hotter the environment, the more people look at something like crypto and they go from saying it's possible it will work to it's sure it will work. And that's when you get in trouble."
He admitted he "did not know enough about cryptocurrencies to know if it's going to work or not", but said he was sceptical because it was impossible to value them: "I believe that assets that don't have cashflow don't have intrinsic value ... a good part of the value has to be conceptual and future oriented."
Oaktree's most high-profile recent deals have been in China, where it seized two crown jewel real estate projects from property developer Evergrande after it defaulted on US$1b of loans from Oaktree. Marks said Oaktree had not yet sold the two sites — Project Castle in Hong Kong and "Venice" on the mainland — but that "the process is going as it should. We're in control of the assets, and we're very optimistic."
Marks said that Beijing's zero-Covid policy was hurting Shanghai's ambitions as a global financial centre: "You can't put an economy into a coma and expect vigorous activity."
Written by: Harriet Agnew
© Financial Times